Since indirect financing can hardly manage the uncertainties involved in innovation, it cannot support large-scale hi-tech industrialization—indirect financing cannot adapt to fluctuations which can occur in the economic structure. In contrast, the financial market

allows everyone to express their views and allows investors to make mistakes. Hence it is more appropriate for direct financing to handle uncertainties, innovation, new ideas and economic activities. For the above reasons, the government must vigorously develop the capital market, especially the venture capital market, to support innovation.

During the 13th Five-Year Plan period, investment will still play a key role in economic growth. This means that raising long-term funds is still one of the primary goals in China's financial sector. Mismatches in maturity and equity have long been major defects in China's monetary mobilization system. On commercial banks' balance sheets, the proportion of mid- and long-term loans is increasing, bringing higher risks.

In the next five years, the government must set up mechanisms to raise long-term funds and equity capital. The key requirements to setting up those mechanisms include vigorously developing capital markets, especially those supporting small business startups and local business startups, establishing diversified long-term credit institutions and developing more diversified industrial investment funds.

The 13th Five-Year Plan vowed to improve the financial institution system where finance in the commercial, development, policy-based and cooperative sectors complement each other.

Previous financial reforms were market-oriented or commerce-oriented. Pursuing reform through just those two areas is not enough under current conditions. Many problems in

today's complex and thorny global society cannot be solved through mere commercial finance. Policy-based finance has played a very important role in addressing the global financial crisis.

Without policy-based finance, the disposal of toxic assets, the reorganization of problematic financial institutions and the recovery of social confidence would have been impossible. In the next few years China will inevitably face problems regarding the disposal of non-performing assets, which currently rely on various types of financial institutions to survive.

Different financial measures are also needed to cope with the challenges China is likely to face, such as massive investments in infrastructure. Modernized industrialization, integrated development of urban and rural areas, new types of urbanization and the Belt and Road Initiative all need large amounts of funding—and commercial finance is not the only solution.

This is an edited excerpt of an article written by Li Yang, chief expert of the National Institution for Finance and Development, and published in Economic Information Daily